[February 24, 2012] NASDAQ OMX GROUP, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of the financial condition and results of operations of NASDAQ OMX should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-K, as well as the discussion under "Item 1A. Risk Factors." Business Overview We are a leading global exchange group that delivers trading, clearing, exchange technology, regulatory, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services, and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement, and many other functions. On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed the following acquisitions during 2008, 2010 and 2011: • PHLX, July 2008; • BSX, August 2008; • Certain subsidiaries of Nord Pool, October 2008; • The assets of North American Energy Credit and Clearing Corp., March 2010; • A derivatives trading market through the purchase of the remaining business of Nord Pool, May 2010; • SMARTS, August 2010; • FTEN, December 2010; • ZVM, December 2010; • Glide Technologies, October 2011; and • The business of RapiData, December 2011. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 22% equity interest in EMCF in January 2009. The financial results of these transactions are included in the consolidated financial results beginning on the date of each acquisition or strategic initiative. Business Environment We serve listed companies, market participants and investors by providing high quality cash equity, derivative and commodities markets, thereby facilitating economic growth and corporate entrepreneurship. We also provide market technology to exchanges and markets around the world. In broad terms, our business performance is impacted by a number of drivers including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for capital markets, and changing technology in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends including: • Trading volumes, particularly in U.S. and Nordic cash equity and derivative securities, which are driven primarily by overall macroeconomic conditions; • The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy, availability of diverse sources of financing as well as tax and regulatory policies; • The level of optimism of our technology customers about the outlook for capital markets and economic stability; 44 -------------------------------------------------------------------------------- Table of Contents • Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe; • Competition for listings and trading related to pricing, product features and service offerings; • Regulatory changes imposed upon certain types of instruments, transactions, or capital market participants; and • Technological advancements and members' demand for speed, efficiency, and reliability. Currently our business drivers are defined by investors' cautious outlook about the pace of global economic recovery and governments' ability to fund their sovereign debt. The lack of confidence in the prospects for growth results in sporadic increases in the level of market volatility and oscillating trading volumes in cash equities. In the U.S., the IPO market and the cash equities trading business were both negatively impacted by investors' diminished confidence in the second half of 2011. However, equity derivative trading volumes remain strong in the U.S. Additional impacts on our business drivers include the international enactment and implementation of new legislative and regulatory initiatives, and the continued rapid evolution and deployment of new technology in the financial services industry. The business environment that influenced our financial performance for the full year 2011 may be characterized as follows: • A weaker pace of new equity issuance in the U.S. with 78 IPOs on The NASDAQ Stock Market, down from 89 in 2010. IPO activity remained slow in the Nordics with 9 IPOs in 2011 on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic; • Matched share volume for all of our U.S. cash equity markets fell by 11.7% relative to 2010, driven by a decline in consolidated U.S. volume and a 1.0% point drop in our matched market share; • A 30.0% increase relative to 2010 in the number of cash equity transactions on our Nordic and Baltic exchanges as the average trade size continues to decrease; • A 0.9% decrease relative to 2010 in the SEK value of cash equity transactions on our Nordic and Baltic exchanges resulting from decreased share volume levels; • Growth of 7.0% relative to 2010 experienced by our Nordic and Baltic exchanges in the number of traded and cleared equity and fixed-income contracts (excluding EUREX); • Intense competition among U.S. exchanges and dealer-owned systems for cash equity trading volume and strong competition between multilateral trading facilities and exchanges in Europe for equity trading volume; • Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets; and • Market trends requiring continued investment in technology to meet customers' demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets. 45 -------------------------------------------------------------------------------- Table of Contents Financial Summary The following summarizes significant changes in our financial performance for the year ended December 31, 2011 when compared with the same period in 2010. Year Ended December 31, 2011 2010 Percentage Change (in millions) Revenues less transaction rebates, brokerage clearance and exchange fees $ 1,690 $ 1,522 11.0 % Operating expenses 994 891 11.6 % Operating income 696 631 10.3 % Interest expense (119 ) (102 ) 16.7 % Asset impairment charge (18 ) - # Income before income taxes 573 526 8.9 % Income tax provision 190 137 38.7 % Net income attributable to NASDAQ OMX $ 387 $ 395 (2.0 )% Diluted earnings per share $ 2.15 $ 1.91 12.6 % # Denotes a variance equal to 100.0%. • Growth in revenues less transaction rebates, brokerage, clearance and exchange fees was primarily due to increases in access services revenues and total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees. • The increase in operating expenses was primarily due to an increase in merger and strategic initiatives expense and higher compensation and benefits expense. • Interest expense increased primarily due to additional interest expense related to the issuance of our $370 million 5.25% senior unsecured notes due January 16, 2018. • Asset impairment charge in 2011 of $18 million was due to an other-than-temporary impairment charge related to our available-for-sale investment security in Dubai Financial Market PJSC, or DFM. • The increase in the income tax provision reflects an increase in the overall effective tax rate from 26.0% in 2010 to 33.2% in 2011. Excluding our merger and strategic initiatives expense, asset impairment charge and other items that are not reflective of our core business performance, net of taxes, consolidated net income attributable to NASDAQ OMX for the year ended December 31, 2011 was $455 million, or $2.53 per diluted share, compared with $411 million, or $1.99 per diluted share, for the year ended December 31, 2010. See "Non-GAAP Financial Measures" for further discussion. For further discussion of our financial performance, see below. In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. The following discussion of results of operations isolates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current period's results by the prior period's exchange rates. Impacts associated with fluctuations in foreign currency are discussed in more detail under "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." For the year ended December 31, 2011, approximately 35.6% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 31.4% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro, Norwegian Krone and Danish Krone. 46-------------------------------------------------------------------------------- Table of Contents The following summarizes significant changes in our financial performance for the year ended December 31, 2011 when compared with the same period in 2010: • Revenues less transaction rebates, brokerage, clearance and exchange fees increased $168 million, or 11.0%, to $1,690 million in 2011, compared with $1,522 million in 2010, reflecting an operational increase in revenues of $117 million and a favorable impact from foreign exchange of $51 million. The increase in operational revenues was primarily due to: • an increase in access services revenues of $49 million, primarily reflecting increased revenues related to FTEN which was acquired in December 2010 and increased demand for services; • an increase in total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees of $37 million, primarily related to U.S. operations; • an increase in market data revenues of $14 million; • an increase in Issuer Services revenues of $19 million, primarily from Corporate Solutions revenues; and • an increase in Market Technology revenues of $13 million, primarily due to broker surveillance and delivery project revenues, partially offset by; • a decrease in total cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees of $14 million, primarily related to U.S. operations. • Operating expenses increased $103 million, or 11.6%, to $994 million in 2011, compared with $891 million in 2010, reflecting an operational increase of $69 million and an unfavorable impact from foreign exchange of $34 million. The operational increase in operating expenses was primarily due to: • an increase in merger and strategic initiatives expense of $34 million, primarily reflecting costs incurred in connection with our joint proposal to acquire NYSE Euronext; • an increase in compensation and benefits expense of $29 million, primarily reflecting additional headcount from acquisitions, as well as stronger financial performance; • an increase in professional and contract services expense of $9 million, primarily reflecting increased consulting costs; • an increase in marketing and advertising expense of $4 million, primarily due to increased advertising on behalf of new issuers; and • an increase in computer operations and data communications expense of $4 million, primarily due to higher expenses from acquisitions, partially offset by; • a decrease in general, administrative and other expense of $13 million, primarily due to lower debt extinguishment and refinancingcharges incurred in 2011 as compared to 2010. • Asset impairment charge of $18 million in 2011 was related to a non-cash, other-than-temporary impairment on our available-for-sale investment security in DFM. • Loss on divestiture of businesses of $11 million in 2010 was related to our decision to close the businesses of both NASDAQ OMX Europe, or NEURO, and Agora-X, LLC, or Agora-X, during the second quarter of 2010. • Interest expense increased $17 million, or 16.7%, to $119 million in 2011, compared with $102 million in 2010. This increase was primarily due to additional interest expense related to the issuance of our $370 million 5.25% senior unsecured notes due January 16, 2018, or the 2018 Notes, in December 2010. These current and prior year items are discussed in more detail below. 47-------------------------------------------------------------------------------- Table of Contents 2012 Outlook For the fourth year in a row, more share value traded on The NASDAQ Stock Market than on any other single cash equities exchange in the world. Our platform continues to stand out as a reliable, flexible, and high capacity system delivering high levels of execution quality and speed under even extremely demanding market conditions. We launched several important initiatives during 2011 that should benefit us during the challenging economic environment anticipated for 2012, which included the migration of The NASDAQ Options Market to the NASDAQ OMX PHLX technology architecture, creating one of the fastest options match engines in the industry. The standout performance and flexibility of our technology has enabled us to enter new markets with a low cost and highly regarded platform offering strong performance to both existing and new clients and creating additional sales opportunities for both our Transactions Services and Market Data businesses. Our 2010 experiences with launching INET technology on our U.S., Nordic, and Baltic exchanges continued in 2011 when the Singapore Stock Exchange and the Australian Stock Exchange each went live with Genium INET technology. By using NASDAQ OMX high performance systems in all of our exchanges, the flexibility of INET and Genium INET technology has been demonstrated around the world. BM&FBOVESPA, the largest stock exchange in Latin America, and Bovespa Market Supervision, the Brazilian self-regulatory organization, announced that they will use NASDAQ OMX's SMARTS Integrity market surveillance platform to monitor trading across their equities and commodities platforms. In February 2011, the SEC implemented a short sale restriction that triggers when a security declines 10% from its previous close. In August 2011, the SEC expanded its existing single stock trading pause to include all Regulation NMS securities. These regulations stem from the events of the May 6, 2010 "flash crash" and the SEC's effort to promote market stability and investor confidence. European regulators are currently considering a number of new policies affecting the operation and infrastructure of the financial markets. We expect global markets to continue to be marked by significant change in 2012, driven primarily by regulatory initiatives in the U.S. and Europe. We expect that cash equities markets will continue to fragment into additional venues, and trading will continue to migrate from exchanges to OTC systems. Conversely, trading in OTC derivatives will begin to move onto exchanges and other public execution facilities. During 2011, the overall IPO market continued its recovery from the impact of the 2008 financial crisis, though many companies decided to delay their offerings amidst the volatile market conditions that began in August 2011 following the U.S. credit rating downgrade and European debt problems. We expect the demand for public equity capital from companies experiencing the gradual return of global economic growth to support increases in the number of IPOs. Furthermore, an improved outlook for equity investments and the number of private companies seeking capital is expected to add to the IPO pipeline in 2012. We continue to leverage the opportunities in market data brought about by the breadth of NASDAQ OMX's data distribution capabilities by offering new data products to our customer base and by strengthening our direct relationships with those customers. We believe that the year ahead will be positive for our business drivers and our operations as the global economy slowly recovers. We believe that our aggressive steps in meeting our cost, revenue, and technology objectives over the last three years will enable us to benefit from improving economic conditions in 2012. We will continue to look for opportunities to further diversify our business with enhanced product offerings and/or acquisitions that are complementary to our existing businesses. Business Segments We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology. Market Services Our Market Services segment includes our U.S. and European Transaction Services businesses, which include Access Services, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including cash equities, derivatives, debt, 48-------------------------------------------------------------------------------- Table of Contents commodities, structured products and ETFs. In addition, in some of the countries where we operate exchanges, we also provide clearing, settlement and depository services. Issuer Services Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. We offer capital raising solutions to companies around the globe and have more worldwide listings than any other global exchange group-approximately 3,500 companies representing approximately $5.3 trillion in total market value as of December 31, 2011. We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai. In addition, through our Corporate Solutions business, we offer companies access to innovative products and services that ease transparency, maximize board efficiency and facilitate corporate governance. Market Technology Our Market Technology segment is the world's leading technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Our technology business also is the sales channel for our complete global offering to other marketplaces. Market Technology provides technology solutions for trading, clearing, settlement, surveillance and information dissemination for markets with wide-ranging requirements, from the leading markets in the U.S., Europe and Asia to smaller African markets. Furthermore, the solutions we offer can handle all classes of assets, including cash equities, currencies, various interest-bearing securities, commodities, energy products and derivatives. Our management allocates resources, assesses performance and manages these businesses as three separate segments. See Note 18, "Business Segments," to the consolidated financial statements for further discussion. Sources of Revenues and Cost of Revenues Market Services Revenues Transaction Services U.S. Cash Equity Trading U.S. cash equity trading revenues are variable, based on individual customer share volumes, and recognized as transactions occur. We charge transaction fees for executing cash equity trades in NASDAQ-listed and other listed securities on The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX as well as on orders that are routed to other market venues for execution. For The NASDAQ Stock Market and NASDAQ OMX PSX, we credit a portion of the per share execution charge to the market participant that provides the liquidity, and for NASDAQ OMX BX, we credit a portion of the per share execution charge to the market participant that takes the liquidity. We record these credits as transaction rebates that are included in cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in accounts payable and accrued expenses in the Consolidated Balance Sheets. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our cash equity trading fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ's, NASDAQ OMX BX's and NASDAQ OMX PSX's platforms, and we recognize these amounts in cost of revenues when incurred. Section 31 fees received are 49-------------------------------------------------------------------------------- Table of Contents included in cash and cash equivalents in the Consolidated Balance Sheets at the time of receipt and, as required by law, the amount due to the SEC is remitted semiannually and recorded as Section 31 fees payable to the SEC in the Consolidated Balance Sheets until paid. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. As we hold the cash received until payment to the SEC, we earn interest income on the related cash balances. European Cash Equity Trading We charge transaction fees for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. These transaction fees are charged per executed order and as per value traded. The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees. U.S. Derivative Trading and Clearing U.S. derivative trading and clearing revenues are variable, based on traded and cleared volumes, and recognized when executed or when contacts are cleared. The principal types of derivative contracts traded on NASDAQ OMX PHLX and The NASDAQ Options Market are equity options, ETF options, index options and currency options. We also operate NFX, which offers trading for foreign currency futures. Similar to U.S. cash equity trading, we credit a portion of the per share execution charge to the market participant that provides the liquidity and record the transaction rebate as a cost of revenues in the Consolidated Statements of Income. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. See "U.S. Cash Equity Trading" above for further discussion. We engage in riskless principal trading of OTC power and gas contracts through our subsidiary NOCC. Revenues are based on notional amounts or volume of power and gas transacted and/or delivered and are recognized upon settlement of the contracts. European Derivative Trading and Clearing European derivative trading and clearing revenues conducted on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen are variable, based on the volume and value of traded and cleared contracts, and recognized when executed or when contracts are cleared. The principal types of derivative contracts traded are stock options and futures, index options and futures, fixed-income options and futures and stock loans. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures, and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. On NASDAQ OMX Stockholm, we also offer clearing services for resale and repurchase agreements. Clearing revenues for resale and repurchase agreements are based on the value and length of the contract and are recognized when cleared. NASDAQ OMX Commodities offers trading and clearing of international power derivatives and carbon products. Our trading and clearing revenues are variable, based on volume, and recognized when contracts are traded or cleared. We also generate clearing revenues for contracts traded on the OTC derivative market which are also recognized when contracts are cleared. In addition, NASDAQ OMX Commodities members are billed an annual fee in January which is recognized ratably over the following 12-month period. Access Services We generate revenues by providing market participants with several alternatives for accessing our markets for a fee. The type of connectivity is determined by the level of functionality a customer needs. As a result, 50-------------------------------------------------------------------------------- Table of Contents access services revenues vary depending on the type of connection provided to customers. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Revenues for providing access to our markets, co-location services and revenues for monthly exchange membership and registration fees are recognized on a monthly basis as the service is provided. Revenues from annual fees for exchange membership and registration fees are recognized ratably over the following 12-month period. Access Services revenues also include revenues from FTEN, which we acquired in December 2010. FTEN is a leading provider of RTRM solutions for the financial securities market. As a market leader in RTRM, FTEN provides broker-dealers and their clients the ability to manage risk more effectively in real-time, which leads to better utilization of capital as well as improved regulatory compliance. Revenues for FTEN services are primarily based on subscription agreements with customers and are recognized when an arrangement exists, services are delivered to the customer, the selling price of the services to be provided under the arrangement is fixed or determinable, and collectability is reasonably assured. Most contracts include professional services, implementation fees, monthly subscription fees from customers accessing on-demand services, and customer support. Implementation fees are recorded to deferred revenue when billed and are recognized ratably over the remaining expected customer life. Monthly professional services, subscription, and usage fees are recognized in the month the service is provided. Market Data Market Data revenues are earned from U.S. tape plans and U.S. and European proprietary market data products. Net U.S. Tape Plans Revenues from U.S. tape plans include eligible UTP Plan revenues that are shared among UTP Plan participants and are presented on a net basis. Under the revenue sharing provision of the UTP Plan, we are permitted to deduct costs associated with acting as the exclusive Securities Information Processor from the total amount of tape revenues collected. After these costs are deducted from the tape revenues, we distribute to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, their share of tape revenues based on a formula, required by Regulation NMS, that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. Revenues from net U.S. tape plans are recognized on a monthly basis. U.S. Market Data Products We collect and process information and earn revenues as a distributor of our own data, as well as select third-party content. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn sell subscriptions for this information to the public. We earn revenues primarily based on the number of data subscribers and distributors of our data. U.S. Market Data revenues are recognized on a monthly basis. These revenues, which are subscription based, are recorded net of amounts due under revenue sharing arrangements with market participants. European Market Data Products European Market Data revenues are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ OMX Commodities, for four classes of securities: cash equities, bonds, derivatives and commodities. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based, are generated primarily based on the number of data subscribers and distributors of our data and are recognized on a monthly basis. 51 -------------------------------------------------------------------------------- Table of Contents Broker Services Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. The primary services offered are flexible back-office systems which allow customers to entirely or partly outsource their company's back-office functions. Revenues from broker services are based on a fixed basic fee for administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Broker Services revenues are recognized on a continuous basis as services are rendered. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse. Issuer Services Revenues Global Listing Services U.S. Listing Services Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees do not require any judgments or assumptions by management as these amounts are recognized ratably over the following 12-month period. Listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration. European Listing Services European listing fees, which are comprised of revenues derived from annual fees received from companies listed on our Nordic and Baltic exchanges and NASDAQ OMX First North, are directly related to the listed companies' market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period. Corporate Solutions Global Listing Services revenues also include fees from Corporate Solutions. Our Corporate Solutions business provides customer support services, products and programs to companies, including companies listed on our exchanges. Revenues primarily include subscription income from Shareholder.com, Directors Desk and Glide Technologies, and fees from GlobeNewswire. Prior to October 2009, Corporate Solutions revenues also included commission income from our Carpenter Moore insurance agency business. In October 2009, we sold substantially all of our Carpenter Moore insurance agency business. Fee income for services other than placement of insurance coverage is recognized as those services are provided. Shareholder.com revenues are based on subscription agreements with customers. Revenues from subscription agreements are recognized ratably over the contract period, generally one year in length. As part of subscription services, customers also are charged usage fees based upon actual usage of the services provided. Revenues from usage fees and other services are recognized when earned. Directors Desk revenues are based on subscriptions for online services for directors. Subscriptions are one year in length and revenues are recognized ratably over the year. Glide Technologies revenues are primarily based on subscription agreements with customers and are recognized ratably over the contract period, generally one year in length. GlobeNewswire generates fees primarily from wire distribution services, and revenues are recognized as services are provided. For our insurance agency business, commission income was recognized when coverage became effective, the premium due under the policy was known or could be reasonably estimated, and substantially all required services related to placing the insurance had been provided. Broker commission adjustments and commissions on premiums billed directly by underwriters were recognized when such amounts could be reasonably estimated. Global Index Group We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group business. Revenues primarily include license fees from these branded indexes, 52-------------------------------------------------------------------------------- Table of Contents associated derivatives and financial products in the U.S. and abroad. We also generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs. We primarily have two types of license agreements: transaction-based licenses and asset-based licenses. Transaction-based licenses are generally renewable long-term agreements. Customers are charged based on transaction volume or a minimum contract amount, or both. If a customer is charged based on transaction volume, we recognize revenue when the transaction occurs. If a customer is charged based on a minimum contract amount, we recognize revenue on a pro-rata basis over the licensing term. Asset-based licenses are also generally long-term agreements. Customers are charged based on a percentage of assets under management for licensed products, per the agreement, on a monthly or quarterly basis. These revenues are recorded on a monthly or quarterly basis over the term of the license agreement. Market Technology Revenues Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. Revenues are primarily derived from license, support and facility management revenues, delivery project revenues, as well as change request, advisory and broker surveillance revenues. We enter into multiple-element sales arrangements to provide technology solutions and services to our customers. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of Vendor Specific Objective Evidence, or VSOE, of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX that are generally entered into in multiple-element sales arrangements. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are also generally entered into in multiple-element sales arrangements and are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management revenues which can be both fixed and volume-based. Revenues for license, support and facility management services are generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. We record the deferral of revenue associated with multiple-element sales arrangements in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other non-current assets in the Consolidated Balance Sheets. Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We record the deferral of this revenue in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other non-current assets in the Consolidated Balance Sheets. Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Change request revenues are recognized in revenue when earned. Advisory services are designed to support our customers' strategies and help them with critical decisions in a highly demanding business environment. Advisory services revenues are recognized in revenue when earned. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world. Broker surveillance revenues are subscription based and are recognized in revenue when earned. 53 -------------------------------------------------------------------------------- Table of Contents NASDAQ OMX's Operating Results Key Drivers The following table includes key drivers for our Market Services, Issuer Services, and Market Technology segments. In evaluating the performance of our business, our senior management closely watches these key drivers. Year Ended December 31, 2011 2010 2009 Market Services Cash Equity Trading NASDAQ securities Average daily share volume (in billions) 2.02 2.19 2.24 Matched market share executed on NASDAQ 27.7 % 28.6 % 33.0 % Matched market share executed on NASDAQ OMX BX 2.1 % 2.9 % 1.4 % Matched market share executed on NASDAQ OMX PSX 1.1 % 0.1 % - Market share reported to the FINRA/NASDAQ Trade Reporting Facility 30.9 % 35.5 % 36.6 % Total market share(1) 61.7 % 67.1 % 71.0 % NYSE securities Average daily share volume (in billions) 4.34 4.83 5.64 Matched market share executed on NASDAQ 13.4 % 13.7 % 15.7 % Matched market share executed on NASDAQ OMX BX 2.3 % 3.6 % 1.9 % Matched market share executed on NASDAQ OMX PSX 0.7 % 0.1 % - Market share reported to the FINRA/NASDAQ Trade Reporting Facility 27.7 % 31.3 % 32.1 % Total market share(1) 44.0 % 48.7 % 49.6 % NYSE Amex and regional securities Average daily share volume (in billions) 1.47 1.45 1.89 Matched market share executed on NASDAQ 18.7 % 20.7 % 24.4 % Matched market share executed on NASDAQ OMX BX 1.9 % 3.1 % 1.4 % Matched market share executed on NASDAQ OMX PSX 1.8 % 0.1 % - Market share reported to the FINRA/NASDAQ Trade Reporting Facility 25.9 % 28.7 % 32.1 % Total market share(1) 48.3 % 52.6 % 57.9 % Total U.S.-listed securities Average daily share volume (in billions) 7.84 8.47 9.77 Matched share volume (in billions) 419.6 475.0 566.6 Matched market share executed on NASDAQ 18.1 % 18.8 % 21.3 % Matched market share executed on NASDAQ OMX BX 2.1 % 3.3 % 1.7 % Matched market share executed on NASDAQ OMX PSX 1.0 % 0.1 % - NASDAQ OMX Nordic and NASDAQ OMX Baltic securities Average daily number of equity trades 370,295 284,840 212,465 Average daily value of shares traded (in billions) $ 3.7 $ 3.3 $ 3.1 Derivative Trading and Clearing U.S. Equity Options Total industry average daily volume (in millions) 16.8 14.3 13.4 NASDAQ OMX PHLX matched market share 23.1 % 23.4 % 17.9 % The NASDAQ Options Market matched market share 4.6 % 4.0 % 3.1 % NASDAQ OMX Nordic and NASDAQ OMX Baltic Average Daily Volume: Options, futures and fixed-income contracts 458,547 428,523 329,350 Nordic equity option contracts traded on EDX(2) - - 95,374 Finnish option contracts traded on EUREX 99,394 117,450 77,312 NASDAQ OMX Commodities Clearing Turnover: Power contracts (TWh)(3) 1,747 2,108 2,162 Carbon contracts (1000 tCO2)(3) 61,569 31,500 45,765 54 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 2010 2009 Issuer Services Initial public offerings: NASDAQ 78 89 33 Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic 9 11 1 New listings: NASDAQ(4) 151 195 131 Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic(5) 34 25 12 Number of listed companies: NASDAQ(6) 2,680 2,778 2,852 Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic(7) 776 780 797 Market Technology Order intake (in millions)(8) $ 134 $ 160 $ 204 Total order value (in millions)(9) $ 458 $ 495 $ 417 (1) Includes transactions executed on NASDAQ's, NASDAQ OMX BX's and NASDAQ OMX PSX's systems plus trades reported through the FINRA/NASDAQ Trade Reporting Facility. (2) In December 2009, derivative volume was transferred to NASDAQ OMX from EDX. (3) Primarily transactions executed on Nord Pool and reported for clearing to NASDAQ OMX Commodities measured by Terawatt hours (TWh) and one thousand metric tons of carbon dioxide (1000 tCO2). (4) New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETFs. (5) New listings include IPOs and represent companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets of NASDAQ OMX First North. (6) Number of listed companies for NASDAQ at period end, including separately listed ETFs. (7) Represents companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets of NASDAQ OMX First North at period end. (8) Total contract value of orders signed during the period. (9) Represents total contract value of orders signed that are yet to be recognized as revenue. Market Technology deferred revenue, as discussed in Note 7, "Deferred Revenue" to the consolidated financial statements, represents cash payments received that are yet to be recognized as revenue for these signed orders. Segment Operating Results Of our total 2011 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,690 million, 67.4% was from our Market Services segment, 21.8% was from our Issuer Services segment and 10.8% was from our Market Technology segment. Of our total 2010 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,522 million, 67.3% was from our Market Services segment, 22.6% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. Of our total 2009 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,453 million, 67.2% was from our Market Services segment, 22.7% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. 55-------------------------------------------------------------------------------- Table of Contents The following table shows our revenues by segment, cost of revenues for our Market Services segment and total revenues less transaction rebates, brokerage, clearance and exchange fees: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Market Services $ 2,886 $ 2,700 $ 2,934 6.9 % (8.0 )% Cost of revenues (1,748 ) (1,675 ) (1,958 ) 4.4 % (14.5 )% Market Services revenues less transaction rebates, brokerage, clearance and exchange fees 1,138 1,025 976 11.0 % 5.0 % Issuer Services 369 344 330 7.3 % 4.2 % Market Technology 183 152 145 20.4 % 4.8 % Other - 1 2 # (50.0 )% Total revenues less transaction rebates, brokerage, clearance and exchange fees $ 1,690 $ 1,522 $ 1,453 11.0 % 4.7 % # Denotes a variance equal to 100.0%. 56 -------------------------------------------------------------------------------- Table of Contents MARKET SERVICES The following table shows total revenues less transaction rebates, brokerage, clearance and exchange fees from our Market Services segment: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Transaction Services Cash Equity Trading Revenues: U.S. cash equity trading(1) $ 1,617 $ 1,600 $ 2,010 1.1 % (20.4 )% Cost of revenues: Transaction rebates (1,087 ) (1,094 ) (1,394 ) (0.6 )% (21.5 )% Brokerage, clearance and exchange fees(1) (375 ) (341 ) (467 ) 10.0 % (27.0 )% Total U.S. cash equity cost of revenues (1,462 ) (1,435 ) (1,861 ) 1.9 % (22.9 )% U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees 155 165 149 (6.1 )% 10.7 % European cash equity trading 93 90 95 3.3 % (5.3 )% Total cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees 248 255 244 (2.7 )% 4.5 % Derivative Trading and Clearing Revenues: U.S. derivative trading and clearing(2) 471 390 232 20.8 % 68.1 % Cost of revenues: Transaction rebates (257 ) (218 ) (81 ) 17.9 % # Brokerage, clearance and exchange fees(2) (29 ) (22 ) (16 ) 31.8 % 37.5 % Total U.S. derivative trading and clearing cost of revenues (286 ) (240 ) (97 ) 19.2 % # U.S. derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees 185 150 135 23.3 % 11.1 % European derivative trading and clearing 128 115 87 11.3 % 32.2 % Total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees 313 265 222 18.1 % 19.4 % Access Services Revenues 223 173 144 28.9 % 20.1 % Total Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees 784 693 610 13.1 % 13.6 % Market Data Revenues: Net U.S. tape plans 115 117 128 (1.7 )% (8.6 )% U.S. market data products 135 126 119 7.1 % 5.9 % European market data products 83 70 78 18.6 % (10.3 )% Total Market Data revenues 333 313 325 6.4 % (3.7 )% Broker Services Revenues 19 15 32 26.7 % (53.1 )% Other Market Services Revenues 2 4 9 (50.0 )% (55.6 )% Total Market Services revenues less transaction rebates, brokerage, clearance and exchange fees $ 1,138 $ 1,025 $ 976 11.0 % 5.0 % # Denotes a variance greater than 100.0%. (1) Includes Section 31 fees of $304 million in 2011, $252 million in 2010 and $314 million in 2009. Section 31 fees are recorded as U.S. cash equity trading revenues with a corresponding amount recorded in cost of revenues. 57 -------------------------------------------------------------------------------- Table of Contents (2) Includes Section 31 fees of $26 million in 2011, $19 million in 2010 and $14 million in 2009. Section 31 fees are recorded as U.S. derivative trading and clearing revenues with a corresponding amount recorded in cost of revenues. Transaction Services Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees increased in both 2011 compared with 2010 and 2010 compared with 2009. The increases were primarily due to increases in derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees and access services revenues. The increase in 2011 was partially offset by lower cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees. An increase in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees also contributed to the increase in 2010. U.S. Cash Equity Trading Revenues U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees decreased in 2011 compared with 2010 and increased in 2010 compared with 2009. The decrease in 2011 was primarily due to a decline in industry trading volumes, as well as a decline in our matched market share, partially offset by modified rates. The increase in 2010 was primarily due to modified rates and lower tiered rebate payouts, partially offset by a significant decline in industry trading volumes and a decline in our matched market share. U.S. cash equity trading revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to an increase in Section 31 pass-through fee revenues and modified rates, partially offset by a decline in industry trading volumes and a decline in our matched market share. The decrease in 2010 was primarily due to a significant decline in industry trading volumes, a decrease in Section 31 pass-through fee revenues charged by us to our customers and a decline in our matched market share. We record Section 31 fees as U.S. cash equity trading revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Pass-through fees can increase or decrease due to rate changes by the SEC, our percentage of the overall industry volumes processed on our systems, and differences in actual dollar value of shares traded. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $304 million in 2011, $252 million in 2010 and $314 million in 2009. The increase in 2011 compared with 2010 was primarily due to an increase in Section 31 fee rates in 2011, partially offset by lower dollar value traded on the NASDAQ and NASDAQ OMX BX trading systems. The decrease in 2010 compared with 2009 was primarily due to lower Section 31 fee rates and lower dollar value traded on NASDAQ and NASDAQ OMX BX's trading systems. For NASDAQ and NASDAQ OMX PSX, we credit a portion of the per share execution charge to the market participant that provides the liquidity and for NASDAQ OMX BX, we credit a portion of the per share execution charge to the market participant that takes the liquidity. These transaction rebates decreased in both 2011 compared with 2010 and 2010 compared with 2009. The decrease in 2011 was primarily due to a decline in industry trading volumes, as well as a decline in our matched market share, partially offset by higher average rebate rates due to changes in our pricing program on the NASDAQ, NASDAQ OMX BX and NASDAQ OMX PSX trading systems. The decrease in 2010 was primarily due to declines in matched share volume on NASDAQ's trading system due to a significant decline in industry volumes, lower tiered rebate payouts and a decline in our matched market share. Brokerage, clearance and exchange fees increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to an increase in Section 31 pass-through fees, partially offset by a decrease in the amount of volume routed by NASDAQ due to declines in industry trading volumes and in our matched market share. The decrease in 2010 was primarily due to a decrease in Section 31 pass-through fees, lower routing costs, and a decrease in the amount of volume routed by NASDAQ due to declines in industry trading volumes. 58 -------------------------------------------------------------------------------- Table of Contents European Cash Equity Trading Revenues European cash equity trading revenues include trading revenues from equity products traded on the NASDAQ OMX Nordic and NASDAQ OMX Baltic exchanges and NEURO (for periods prior to closing our NEURO business). European cash equity trading revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to a favorable impact from foreign exchange of $7 million, partially offset by a decrease in trading activity. The decrease in 2010 was primarily due to revised trading fees introduced in the first quarter of 2010, partially offset by an increase in trading activity and a favorable impact from foreign exchange of $2 million. U.S. Derivative Trading and Clearing Revenues U.S. derivative trading and clearing revenues and revenues less transaction rebates, brokerage, clearance and exchange fees increased in both 2011 compared with 2010 and 2010 compared with 2009. The increases were primarily due to increases in industry trading volumes and our matched market share. The increase in 2010 was partially offset by lower average net fees for traded contracts. The increase in U.S. derivative trading and clearing revenues in both 2011 compared with 2010 and 2010 compared with 2009 was also due to higher Section 31 pass-through fee revenues as discussed below. Similar to U.S. cash equity trading, Section 31 fees are recorded as derivative trading and clearing revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $26 million in 2011, $19 million in 2010 and $14 million 2009. The increase in both 2011 and 2010 compared with the prior year periods is primarily due to an increase in dollar value traded and higher Section 31 fee rates. Transaction rebates, in which we credit a portion of the per share execution charge to the market participant, increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to increases in industry trading volumes and market share. The increase in 2010 was primarily due to a revised fee structure implemented in the first quarter of 2010 along with higher volumes traded and an increase in our matched market share. Brokerage, clearance and exchange fees increased in both 2011 compared with 2010 and 2010 compared with 2009. The increases were primarily due to an increase in Section 31 pass-through fees. European Derivative Trading and Clearing Revenues European derivative trading and clearing revenues include trading and clearing revenues from derivative products traded on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen, clearing revenues from resale and repurchase agreements on NASDAQ OMX Stockholm and revenues from NASDAQ OMX Commodities. Beginning in May 2010, trading and clearing revenues for energy and carbon products include revenues from Nord Pool. European derivative trading and clearing revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to a favorable impact from foreign exchange of $11 million, partially offset by lower trading activity in energy products. The increase in 2010 was primarily due to higher trading and clearing revenues due to the transfer of derivative volume from EDX to NASDAQ OMX in the fourth quarter of 2009. Also contributing to the increase in 2010 was transaction activity associated with clearing resale and repurchase agreements, which was launched in the fourth quarter of 2010, and a favorable impact from foreign exchange of $5 million. 59 -------------------------------------------------------------------------------- Table of Contents The following table shows revenues from European derivative trading and clearing: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) European Derivative Trading and Clearing Revenues: Options and futures contracts $ 55 $ 49 $ 33 12.2 % 48.5 % Energy and carbon products 45 41 35 9.8 % 17.1 % Fixed-income products 22 18 14 22.2 % 28.6 % Other revenues and fees 6 7 5 (14.3 )% 40.0 % Total European Derivative Trading and Clearing revenues $ 128 $ 115 $ 87 11.3 % 32.2 % Access Services Revenues Access Services revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to an increase in revenues from FTEN, which was acquired in December 2010, and increased demand for services. The increase in 2010 was primarily due to increased demand for co-location and network connectivity services and a revised fee structure for access services. Market Data Market Data revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to increases in U.S. and European market data products revenues and a favorable impact from foreign exchange, partially offset by a decrease in net U.S. tape plans revenues. The decrease in 2010 was primarily due to decreases in net U.S. tape plans revenues and European market data products revenues, partially offset by an increase in U.S. market data products revenues. Net U.S. Tape Plans Revenues The decline in net U.S. tape plans revenues in 2011 compared with 2010 was primarily due to lower plan shareable revenues and declines in NASDAQ's trading and quoting market share of U.S. cash equities, as calculated under the SEC-mandated market data revenue quoting and trading formula. The decline in net U.S. tape plans revenues in 2010 compared with 2009 was primarily due to declines in NASDAQ's trading and quoting market share of U.S. cash equities, as calculated under the SEC-mandated market data revenue quoting and trading formula, and reductions in the size of the tape plan revenue pools mainly driven by declines in subscriber populations. U.S. Market Data Products Revenues The increase in U.S. market data products revenues in 2011 compared with 2010 was primarily due to higher customer demand for proprietary data products, mainly index data, and higher audit fees. The increase in U.S. market data products revenues in 2010 compared with 2009 was primarily due to growth of new products such as BX TotalView, options data feeds and mutual fund products, partially offset by discontinued products. European Market Data Products Revenues The increase in European market data products revenues in 2011 compared with 2010 was primarily due to modified fees for market data products and a favorable impact from foreign exchange of $6 million. The decrease in European market data products revenues in 2010 compared with 2009 was primarily due to declines in subscriber populations and discontinued products, partially offset by modified fees for market data products and a favorable impact from foreign exchange of $1 million. 60 -------------------------------------------------------------------------------- Table of Contents Broker Services Broker Services revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 is primarily due to new customers and a favorable impact from foreign exchange of $2 million. The decrease in 2010 was primarily due to the sale of our Broker Services operations in the United Kingdom to TD Waterhouse in November 2009. ISSUER SERVICES The following table shows revenues from our Issuer Services segment: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Global Listing Services Revenues: Annual renewal $ 118 $ 113 $ 117 4.4 % (3.4 )% Listing of additional shares 39 39 37 - 5.4 % Initial listing 16 18 20 (11.1 )% (10.0 )% Total U.S. listing services 173 170 174 1.8 % (2.3 )% European listing services 54 49 45 10.2 % 8.9 % Corporate Solutions 90 78 72 15.4 % 8.3 % Total Global Listing Services revenues 317 297 291 6.7 % 2.1 % Global Index Group Revenues 52 47 39 10.6 % 20.5 % Total Issuer Services revenues $ 369 $ 344 $ 330 7.3 % 4.2 % Global Listing Services Global Listing Services revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increases in both 2011 and 2010 were primarily due to increases in Corporate Solutions and European listing services revenues. European listing services revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to a favorable impact from foreign exchange of $5 million. The increase in 2010 was primarily due to an increase in the market capitalization of Nordic issuers, partially offset by a decrease in the number of listed companies from 797 as of December 31, 2009 to 780 as of December 31, 2010. European listing services revenues are recognized ratably over a 12-month period. Corporate Solutions revenues increased in both 2011 compared with 2010 and 2010 compared with 2009 primarily due to expanding customer utilization of Shareholder.com, Directors Desk and GlobeNewswire, as well as revenues from ZVM, which was acquired in December 2010, and Glide Technologies, which was acquired in October 2011. Partially offsetting the increase in 2010 was a decrease in Carpenter Moore revenues primarily due to the sale of substantially all of our Carpenter Moore insurance agency business in October 2009. Global Index Group Revenues Global Index Group revenues increased in both 2011 compared with 2010 and 2010 compared with 2009 primarily due to an increase in underlying assets associated with NASDAQ OMX-licensed ETFs, as well as additional demand for new licensed ETFs and other financial products, partially offset by lower futures and options volumes. 61 -------------------------------------------------------------------------------- Table of Contents MARKET TECHNOLOGY The following table shows revenues from our Market Technology segment: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Market Technology: License, support and facility management $ 115 $ 103 $ 106 11.7 % (2.8 )% Delivery project 24 17 20 41.2 % (15.0 )% Change request, advisory and broker surveillance 44 32 19 37.5 % 68.4 % Total Market Technology revenues $ 183 $ 152 $ 145 20.4 % 4.8 % Market Technology revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to a favorable impact from foreign exchange of $18 million, as well as operational increases in change request, advisory and broker surveillance revenues and delivery project revenues. The increase in 2010 was primarily due to an increase in change request, advisory and broker surveillance revenues, partially offset by decreases in delivery project revenues and license, support and facility management revenues. License, Support and Facility Management Revenues License, support and facility management revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to a favorable impact from foreign exchange of $12 million. The decrease in 2010 was primarily due to a decrease in facility management revenues due to the loss of facility management customers. Partially offsetting this decrease was an increase in support revenues resulting from our acquisition of SMARTS in August 2010, clients entering the support stage of their contracts and a favorable impact from foreign exchange of $6 million in 2010. Delivery Project Revenues Delivery project revenues increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to the recognition of previously deferred revenues in the current periods, as well as a favorable impact from foreign exchange of $2 million. The decrease in 2010 was primarily due to higher deliveries of market technology contracts during 2009, partially offset by a favorable impact from foreign exchange of $1 million in 2010. Delivery project revenues are derived from the system solutions developed and sold by NASDAQ OMX. Total revenues, as well as costs incurred, are typically deferred until the customization and any significant modifications are completed and are then recognized over the post contract support period. Change Request, Advisory and Broker Surveillance Revenues Change request, advisory and broker surveillance revenues increased in both 2011 compared with 2010 and 2010 compared with 2009. The increases were primarily due to an increase in broker surveillance revenues resulting from our acquisition of SMARTS in August 2010. The increase in 2010 was also due to higher change request activity. In addition, there was a favorable impact from foreign exchange of $4 million in 2011. Total Order Value As of December 31, 2011, total order value, which represents the total contract value of orders signed that are yet to be recognized as revenues, was $458 million. Market Technology deferred revenue of $128 million, which is included in this amount, represents cash payments received that are yet to be recognized as revenue for 62 -------------------------------------------------------------------------------- Table of Contents these signed orders. See Note 7, "Deferred Revenue," to the consolidated financial statements for further discussion. The recognition and timing of these revenues depends on many factors, including those that are not within our control. As such, the following table of Market Technology revenues to be recognized in the future represents our best estimate: Total Order Value (in millions) Fiscal year ended: 2012 $ 141 2013 117 2014 77 2015 59 2016 39 2017 and thereafter 25 Total $ 458 Expenses Operating Expenses The following table shows our operating expenses: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Compensation and benefits $ 458 $ 412 $ 408 11.2 % 1.0 % Marketing and advertising 24 20 15 20.0 % 33.3 % Depreciation and amortization 109 103 104 5.8 % (1.0 )% Professional and contract services 90 78 76 15.4 % 2.6 % Computer operations and data communications 65 58 58 12.1 % - Occupancy 91 88 81 3.4 % 8.6 % Regulatory 35 35 32 - 9.4 % Merger and strategic initiatives 38 4 17 # (76.5 )% General, administrative and other 84 93 59 (9.7 )% 57.6 % Total operating expenses $ 994 $ 891 $ 850 11.6 % 4.8 % # Denotes a variance greater than 100.0%. Total operating expenses increased $103 million in 2011 compared with 2010 and $41 million in 2010 compared with 2009. The increase in 2011 reflects an operational increase of $69 million and an unfavorable impact from foreign exchange of $34 million. The operational increase of $69 million in 2011 was primarily due to an increase in merger and strategic initiatives expenses, compensation and benefits expense, professional and contract services expense, marketing and advertising expense, and computer operations and data communications expense, partially offset by a decrease in general, administrative and other expense. The increase in 2010 reflects an operational increase of $27 million and an unfavorable impact from foreign exchange of $14 million. The operational increase of $27 million in 2010 was primarily due to an increase in general, administrative and other expense for charges incurred in connection with the January 2010 repayment of our senior secured credit facilities in place as of December 31, 2009, partially offset by asset retirements in the third quarter of 2009 related to obsolete technology assets. Compensation and benefits expense increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to an increase in salary expense from SMARTS, FTEN and ZVM, which were acquired in the second half of 2010, and Glide Technologies, which was acquired in October 2011, 63-------------------------------------------------------------------------------- Table of Contents and higher compensation expenses reflecting stronger financial performance, as well as an unfavorable impact from foreign exchange of $17 million. Compensation and benefits expense in 2010 compared with 2009 reflects an unfavorable impact from foreign exchange of $7 million and higher compensation expenses reflecting stronger financial performance, partially offset by a decrease in salary expense primarily due to the sale of substantially all of our Carpenter Moore insurance agency business and our Broker Services operations in the United Kingdom in the fourth quarter of 2009. Headcount, including staff employed at consolidated entities where we have a controlling financial interest, increased to 2,433 employees at December 31, 2011 from 2,395 employees at December 31, 2010 and 2,235 employees at December 31, 2009. The increase in headcount in 2011 compared with 2010 was primarily due to our acquisition of Glide Technologies. The increase in headcount in 2010 compared with 2009 was primarily due to our acquisitions of SMARTS, FTEN and ZVM. Marketing and advertising expense increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to increased advertising on behalf of new issuers. The increase in 2010 was primarily due to production and media costs of a television advertisement campaign, as well as increased advertising on behalf of new issuers. Depreciation and amortization expense increased in 2011 compared with 2010 and decreased slightly in 2010 compared with 2009. The increase in 2011 was primarily due to an unfavorable impact from foreign exchange of $4 million, as well as additional depreciation and amortization expense as a result of our acquisitions of SMARTS, FTEN and ZVM, which were acquired in the second half of 2010, and Glide Technologies, which was acquired in October 2011. Professional and contract services expense increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to costs incurred for information technology security consultants and an unfavorable impact from foreign exchange of $3 million. The increase in 2010 was primarily due to an unfavorable impact from foreign currency of $1 million. Computer operations and data communications expense increased in 2011 compared with 2010 and remained flat in 2010 compared with 2009. The increase in 2011 was primarily due to our acquisitions of SMARTS, FTEN and ZVM, which were acquired in the second half of 2010, and an unfavorable impact from foreign exchange of $3 million. Occupancy expense increased in both 2011 compared with 2010 and 2010 compared with 2009. The increase in 2011 was primarily due to an unfavorable impact from foreign exchange of $3 million. The increase in 2010 was primarily due to an increase in co-location rent related to the build-out of our data centers, a $5 million sublease loss reserve recorded in 2010 due to our decision to vacate space we currently lease in Philadelphia, San Francisco and London, and an unfavorable impact from foreign exchange of $1 million. Partially offsetting these increases in 2010 was an $8 million sublease loss reserve recorded in 2009 on the space we occupy in Stockholm, Sweden. Regulatory expense remained flat in 2011 compared with 2010 and increased in 2010 compared with 2009. The increase in 2010 was primarily due to outsourcing the regulation of NASDAQ OMX PHLX to FINRA in 2010. FINRA provides regulatory services to The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX PSX and the markets operated and regulated by NASDAQ OMX BX, including the regulation of trading activity and surveillance and investigative functions. Merger and strategic initiatives expense was $38 million in 2011 compared with $4 million in 2010 and $17 million in 2009. Merger and strategic initiatives expense for 2011 primarily related to costs incurred for advisors, bank commitment fees, legal and other professional services related to our joint proposal to acquire NYSE Euronext, as well as costs related to our acquisition of Glide Technologies in October 2011. Merger and strategic initiatives expense for 2010 included legal and consulting costs related to our acquisitions of SMARTS and FTEN and costs related to strategic initiatives. Merger and strategic initiatives expense for 2009 was directly 64-------------------------------------------------------------------------------- Table of Contents attributable to the business combination with OMX AB and the acquisition of PHLX, but did not qualify as purchase accounting adjustments. The costs primarily included consulting and legal costs related to our integration of OMX AB and PHLX. Merger expenses in 2009 also included costs related to sales and use tax exposures that existed on previous acquisitions. General, administrative and other expense was $84 million in 2011 compared with $93 million in 2010 and $59 million in 2009. General, administrative and other expense for 2011 included a pre-tax charge of $25 million related to the write-off of a portion of the unamortized balance of debt issuance costs and debt discount related to the repayment of $335 million of the aggregate principal amount outstanding of the 2013 Convertible Notes, that was completed in October 2011, a pre-tax charge of $6 million related to the write-off of the remaining unamortized balance of debt issuance costs related to the $700 million senior unsecured term loan facility that was repaid in September 2011, as well as an unfavorable impact from foreign exchange of $4 million. General, administrative and other expense for 2010 included a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs of $28 million incurred in conjunction with our senior secured credit facilities in place as of December 31, 2009, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. General, administrative and other expense for 2009 included asset retirements of $10 million related to obsolete technology assets, partially offset by the recognition of pre-tax gains of $4 million on the early extinguishment of debt, net of debt issuance and other costs. Non-operating Income and Expenses The following table shows our non-operating income and expenses: Year Ended December 31, Percentage Change 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 (in millions) Interest income $ 11 $ 9 $ 13 22.2 % (30.8 )% Interest expense (119 ) (102 ) (102 ) 16.7 % - Net interest expense (108 ) (93 ) (89 ) 16.1 % 4.5 % Dividend and investment income 1 (3 ) 2 # # Asset impairment charge (18 ) - - # - Loss on divesture of businesses - (11 ) - # # Income (loss) from unconsolidated investees, net 2 2 (107 ) - # Debt conversion expense - - (25 ) - # Loss on sale of investment security - - (5 ) - # Gain on sales of businesses - - 12 - # Total non-operating expenses $ (123 ) $ (105 ) $ (212 ) 17.1 % (50.5 )% # Denotes a variance equal to or greater than 100.0%. Total non-operating expenses were $123 million in 2011 compared with $105 million in 2010 and $212 million in 2009. Total non-operating expenses for 2011 primarily include net interest expense of $108 million and a pre-tax impairment charge of $18 million on our investment security in DFM. Total non-operating expenses for 2010 primarily include net interest expense and a pre-tax loss on divesture of businesses. Total non-operating expenses for 2009 primarily include net interest expense, as well as pre-tax impairment charges on unconsolidated investees, debt conversion expense, and a loss on the sale of an investment security, partially offset by a gain on sale of businesses. 65-------------------------------------------------------------------------------- Table of Contents Interest Income Interest income increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to an increase in cash and cash equivalents in 2011 and a favorable impact from foreign exchange of $1 million. The decrease in 2010 was primarily due to lower average interest rates earned on our short term investments included in cash and cash equivalents, as well as on financial investments, at fair value in our Consolidated Balance Sheets. Interest Expense Interest expense for 2011 was $119 million, and was comprised of $97 million of interest expense, $13 million of non-cash expense associated with accretion of debt discounts, $6 million of non-cash debt issuance amortization expense, and $3 million of other bank and investment-related fees. Interest expense increased in 2011 compared with 2010 primarily due to higher average outstanding debt obligations in 2011 resulting from the issuance of our 2018 Notes in December 2010 to partially finance the repurchase of shares. See Note 8, "Debt Obligations," to the consolidated financial statements for further discussion of our debt obligations. Interest expense for 2010 was $102 million, and was comprised of $81 million in interest expense, $14 million of non-cash expense associated with accretion of debt discounts and $7 million in non-cash debt issuance amortization expense. Interest expense remained flat in 2010 compared with 2009 as decreases in interest expense due to lower average outstanding debt obligations in 2010 resulting from principal amortization payments made in 2009 and 2010 and repurchases of our debt during 2009 were offset by increases in interest expense due to higher average interest rates on our debt obligations. Dividend and Investment Income Dividend and investment income increased in 2011 compared with 2010 and decreased in 2010 compared with 2009. The increase in 2011 was primarily due to an increase in the fair value of our government debt securities portfolio as a result of decreased interest rates. The decrease in 2010 was primarily due to a decrease in the fair value of our government debt securities portfolio as a result of increased interest rates. Asset Impairment Charge In the fourth quarter of 2011, we recorded a non-cash, other-than-temporary impairment charge of $18 million related to our available-for-sale investment security in DFM. See "Investment in DFM," of Note 5, "Investments," to the consolidated financial statements for further discussion. Loss on Divestiture of Businesses The loss on divestiture of businesses of $11 million in 2010 was due to our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million) in the second quarter of 2010. Income (Loss) from Unconsolidated Investees, net Net income from unconsolidated investees of $2 million in both 2011 and 2010 was related to our share in the earnings and losses of our equity method investments. The net loss in 2009 of $107 million was primarily due to impairment charges related to our investments in NASDAQ Dubai and Agora-X and the sale of our shares in Orc Software AB, or Orc. See below for further discussion. Impairment of NASDAQ Dubai In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. The realignment was completed in May 2010 and at that time, NASDAQ Dubai became a wholly-owned 66-------------------------------------------------------------------------------- Table of Contents subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remained unchanged. In connection with the realignment of the ownership structure discussed above, a third-party specialist determined the fair value of NASDAQ Dubai. Based on this valuation, we determined our carrying value of NASDAQ Dubai was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in an $82 million pre-tax, non-cash impairment charge for the year ended December 31, 2009. At the time of the realignment in May 2010, we recorded a pre-tax, non-cash loss of $1 million in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income, which was based on the difference between the price of DFM common stock multiplied by the number of shares of DFM acquired and the carrying value of our investment in NASDAQ Dubai at the time of the exchange. NASDAQ OMX originally contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33 1/3% equity stake in NASDAQ Dubai in February 2008. At that time, NASDAQ OMX valued its total NASDAQ Dubai investment at $128 million. Prior to the impairment, the investment had a carrying value of $120 million. Impairment of Agora-X In December 2009, we entered into an agreement to increase our investment in Agora-X from 20% to 85%. In evaluating the fair value of the total investment, it was determined that our carrying value of Agora-X was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in a pre-tax, non-cash impairment charge of $5 million. Sale of Orc Shares During the second quarter of 2009, we sold our shares in Orc, representing 25.25% of the share capital of Orc, to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which is net of costs directly related to the sale, primarily broker fees. Debt Conversion Expense In the third quarter of 2009, we recorded debt conversion expense of $25 million related to an inducement for conversion of most of the 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the present value of the series A convertible preferred stock issued of $15 million, and debt issuance and other costs of $1 million. See "Preferred Stock," of Note 12, "NASDAQ OMX Stockholders' Equity," to the consolidated financial statements for further discussion. Loss on Sale of Investment Security In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment in Oslo Børs Exchange, or Oslo. During the second quarter of 2009, we made a strategic decision to sell this investment, demonstrating our intent to no longer hold this investment, and recorded a $5 million loss, which is net of costs directly related to the sale, primarily broker fees. Gain on Sales of Businesses In October 2009, we sold substantially all of our Carpenter Moore insurance agency business. Certain assets of the western region direct practice insurance brokerage business were sold to Woodruff-Sawyer & Co. and the eastern region insurance brokerage business was sold to Aon Risk Services Companies, Inc. In connection with these sales, we recorded a gain of $7 million. 67-------------------------------------------------------------------------------- Table of Contents In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million. Income Taxes NASDAQ OMX's income tax provision was $190 million in 2011 compared with $137 million in 2010 and $128 million in 2009. The overall effective tax rate was 33.2% in 2011, 26.0% in 2010 and 32.7% in 2009. The increase in the effective tax rate in 2011 when compared with 2010 was due to the impact of changes in tax laws in certain jurisdictions where NASDAQ OMX operates. Furthermore, in the third quarter of 2011, we recorded significant adjustments due to provision-to-tax return adjustments related to our 2010 tax return liabilities and a corresponding effect on deferred tax liabilities. The lower effective tax rate in 2010 when compared with 2009 was primarily due to the restructuring of certain NASDAQ OMX subsidiaries. Also, 2010 results included reductions in deferred tax liabilities due to a revised effective tax rate. The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses. These same and other factors, including history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets. In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense. NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return and applicable state and local income tax returns and non-U.S. income tax returns. Federal income tax returns for the years 2008 and 2009 are currently under audit by the Internal Revenue Service. The review of federal income tax returns for the years 2007 and 2010 is expected to commence in 2012. Several state tax returns are currently under examination by the respective tax authorities for the years 2000 through 2009 and we are subject to examination for 2010. Non-U.S. tax returns are subject to review by the respective tax authorities for the years 2003 through 2010. In 2011, we settled audits with various taxing jurisdictions and paid a total of $1 million with respect to the years 2006 through 2009. Since this amount was included in our unrecognized tax benefits as of December 31, 2010, such payments did not affect our 2011 effective tax rate. The outcome of these audits did not have a material impact on our financial position or results of operations. We anticipate that the amount of unrecognized tax benefits at December 31, 2011 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments will not have a material impact on our consolidated financial position or results of operations. In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority in which such authority challenges certain interest expense deductions claimed by NASDAQ OMX in Finland for the year 2008. NASDAQ OMX's tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. The appeal also demands certain penalties be paid with regard to the company's tax return filing position. If the Finnish Tax Authority prevails in its challenge, additional tax and penalties for the years 2008-2011 would total approximately $23 million. We expect the Finnish Tax Authority to agree with our position once its review is completed and, as such, believe it is unlikely NASDAQ OMX will be assessed any additional tax and penalties. Through December 31, 2011, we have recorded the tax benefits associated with the filing position. In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a 68 -------------------------------------------------------------------------------- Table of Contents favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that the interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency appealed the Council's ruling to the Swedish Supreme Administrative Court. In November 2011, the Swedish Supreme Administrative Court rendered a ruling consistent with the favorable ruling from the Swedish Tax Council for Advance Tax Rulings. Since we have recorded all tax benefits associated with this matter, the ruling did not affect our financial position or results of operations. Net Loss Attributable to Noncontrolling Interests Net loss attributable to noncontrolling interests was $4 million in 2011 compared with $6 million in 2010 and $3 million in 2009. The losses are primarily attributable to noncontrolling interests in IDCG. Non-GAAP Financial Measures In addition to disclosing results determined in accordance with U.S. GAAP, we have also provided non-GAAP net income attributable to NASDAQ OMX and non-GAAP diluted earnings per share. Management uses this non-GAAP information internally, along with U.S. GAAP information, in evaluating our performance and in making financial and operational decisions. We believe our presentation of these measures provides investors with greater transparency and supplemental data relating to our financial condition and results of operations. In addition, we believe the presentation of these measures is useful to investors for period-to-period comparison of results as the items described below do not reflect operating performance. These measures are not in accordance with, or an alternative to, U.S. GAAP, and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend investors review the U.S. GAAP financial measures included in this Annual Report on Form 10-K, including our consolidated financial statements and the notes thereto. When viewed in conjunction with our U.S. GAAP results and the accompanying reconciliation, we believe these non-GAAP measures provide greater transparency and a more complete understanding of factors affecting our business than U.S. GAAP measures alone. Our management uses these measures to evaluate operating performance, and management decisions made during the reporting period are made by excluding certain items that we believe have less significance on, or do not impact, the day-to-day performance of our business. We understand that analysts and investors regularly rely on non-GAAP financial measures, such as non-GAAP net income and non-GAAP diluted earnings per share, to assess operating performance. We use non-GAAP net income attributable to NASDAQ OMX and non-GAAP diluted earnings per share because they more clearly highlight trends in our business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures, since these measures eliminate from our results specific financial items that have less bearing on our operating performance. Non-GAAP net income attributable to NASDAQ OMX for the periods presented below is calculated by adjusting net income attributable to NASDAQ OMX for charges or gains related to acquisition and divestiture transactions, integration activities related to acquisitions and other significant infrequent charges or gains and their related income tax effects that are not related to our core business. We do not believe these items are representative of our future operating performance since these charges were not consistent with our normal operating performance. Non-GAAP adjustments for the year ended December 31, 2011 primarily related to the following: (i) merger and strategic initiatives costs, primarily costs for advisors, bank commitment fees, legal and other professional services, related to our joint proposal to acquire NYSE Euronext, as well as costs related to recent acquisitions and other strategic initiatives, (ii) debt extinguishment and refinancing charges related to the repayment of the 2013 Convertible Notes and the repayment of our $700 million senior unsecured term loan facility, (iii) an asset impairment charge related to our available-for-sale investment security in DFM, (iv) an adjustment to the income tax provision to reflect these non-GAAP adjustments, and (v) significant tax adjustments, net due to the impact of changes in tax laws in certain jurisdictions where NASDAQ OMX operates. 69-------------------------------------------------------------------------------- Table of Contents Non-GAAP adjustments for the year ended December 31, 2010 primarily related to the following: (i) merger and strategic initiatives costs, consisting primarily of costs for legal and consulting related to our acquisitions of SMARTS and FTEN, (ii) debt extinguishment and refinancing charges related to the repayment of our senior secured credit facilities in place as of December 31, 2009, (iii) a sublease loss reserve charge recorded on space we occupy in Philadelphia, San Francisco and London due to our decision to vacate this space, (iv) a loss on divestiture of businesses due to our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million), (v) asset retirement charges primarily related to obsolete technology, (vi) workforce reduction costs related to acquisitions, (vii) an adjustment to the income tax provision to reflect these non-GAAP adjustments, and (viii) significant tax adjustments, net due to provision-to-tax return adjustments related to our 2009 tax return liabilities. Non-GAAP adjustments for the year ended December 31, 2009 primarily related to the following: (i) merger and strategic initiatives costs directly attributable to the business combination with OMX AB and the acquisition of PHLX, which did not qualify as purchase accounting adjustments, (ii) a gain on early extinguishment of a portion of the 2013 Convertible Notes, net of costs, (iii) a sublease loss reserve charge recorded on the space we occupy in Stockholm, (iv) asset retirement charges primarily related to obsolete technology, (v) workforce reduction costs related to acquisitions, (vi) a debt conversion expense related to an inducement for conversion of most of our 3.75% convertible notes into common stock, (vii) impairment charges related to our investments in NASDAQ Dubai and Agora-X, as well as the sale of our Orc shares, (viii) a loss on the sale of our available-for-sale investment security in Oslo, (ix) a gain on the sale of substantially all of our Carpenter Moore insurance agency business and a gain on the sale of our Broker Services operations in the United Kingdom, (x) an adjustment to the income tax provision to reflect these non-GAAP adjustments, and (xi) significant tax adjustments, net primarily due to reductions in 2008 U.S. tax liabilities based on recent tax return filings and reductions in U.S. tax liabilities for years which are no longer subject to examination. 70-------------------------------------------------------------------------------- Table of Contents The following table represents reconciliations between U.S. GAAP net income and diluted earnings per share and non-GAAP net income and diluted earnings per share: Year Ended Year Ended Year Ended December 31, 2011 December 31, 2010 December 31, 2009 Diluted Diluted Diluted Net Earnings Per Net Earnings Per Net Earnings Per Income Share Income Share Income Share (in millions, except per share amounts) U.S. GAAP net income attributable to NASDAQ OMX and diluted earnings per share $ 387 $ 2.15 $ 395 $ 1.91 $ 266 $ 1.25 Non-GAAP adjustments: Merger and strategic initiatives 38 0.21 4 0.02 17 0.08 Extinguishment of debt 31 0.17 40 0.20 (4 ) (0.02 ) Sublease reserves - - 5 0.03 8 0.04 Loss on divestiture of businesses - - 11 0.05 - - Asset retirements - - 2 0.01 13 0.06 Workforce reductions - - 9 0.04 15 0.07 Debt conversion expense - - - - 25 0.12 Asset impairment charge 18 0.10 - - - - Impairment of NASDAQ Dubai - - - - 82 0.38 Impairment of Agora-X - - - - 5 0.02 Sale of Orc shares - - - - 19 0.09 Loss on sale of investment security - - - - 5 0.02 Gain on sale of businesses - - - - (12 ) (0.06 ) Other 4 0.03 5 0.02 5 0.02 Adjustment to the income tax provision to reflect non-GAAP adjustments(1) (28 ) (0.16 ) (28 ) (0.14 ) (47 ) (0.21 ) Significant tax adjustments, net 5 0.03 (32 ) (0.15 ) (8 ) (0.04 ) Total non-GAAP adjustments, net of tax 68 0.38 16 0.08 123 0.57 Non-GAAP net income attributable to NASDAQ OMX and diluted earnings per share $ 455 $ 2.53 $ 411 $ 1.99 $ 389 $ 1.82 Weighted-average common shares outstanding for diluted earnings per share 180,011,247 206,514,655 214,537,907 (1) We determine the tax effect of each item based on the tax rules in the respective jurisdiction where the transaction occurred. Liquidity and Capital Resources While global markets and economic conditions continue to improve from adverse levels experienced during the past several years, investors and lenders remain cautious about the pace of the global economic recovery. This lack of confidence in the prospects for growth could result in sporadic increases in market volatility and lackluster trading volumes, which could in turn affect our ability to obtain additional funding from lenders. Currently, our cost and availability of funding remain healthy, as evidenced by our ability to refinance our credit facilities. Historically, we have funded our operating activities and met our commitments through cash generated by operations, augmented by the periodic issuance of our common stock in the capital markets and by issuing debt obligations. In addition to these cash sources, we have a $750 million revolving credit commitment (including a 71 -------------------------------------------------------------------------------- Table of Contents swingline facility and letter of credit facility) under our senior unsecured five-year credit facility. As of December 31, 2011, $524 million is available. See "2011 Credit Facility," of Note 8, "Debt Obligations," to the consolidated financial statements for further discussion. In the near term, we expect that our operations will provide sufficient cash to fund our operating expenses, capital expenditures, interest payments on our debt obligations, and our share repurchase program. Working capital (calculated as current assets less current liabilities) was $543 million at December 31, 2011, compared with $279 million at December 31, 2010, an increase of $264 million. Principal factors that could affect the availability of our internally-generated funds include: • deterioration of our revenues in any of our business segments; • changes in our working capital requirements; and • an increase in our expenses. Principal factors that could affect our ability to obtain cash from external sources include: • operating covenants contained in our credit facility that limit our total borrowing capacity; • increases in interest rates applicable to our floating rate loans under our credit facility; • credit rating downgrades, which could limit our access to additional debt; • a decrease in the market price of our common stock; and • volatility in the public debt and equity markets. The following sections discuss the effects of changes in our financial assets, debt obligations, derivative clearing and broker-dealer net capital requirements, and cash flows on our liquidity and capital resources. Financial Assets The following table summarizes our financial assets: December 31, December 31, 2011 2010 (in millions) Cash and cash equivalents $ 506 $ 315 Restricted cash 43 60 Non-current restricted cash 105 105 Financial investments, at fair value 279 253 Total financial assets $ 933 $ 733 Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents include cash in banks and all non-restricted highly liquid investments with original maturities of three months or less at the time of purchase. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy, and alternative investment choices. As of December 31, 2011, our cash and cash equivalents of $506 million were primarily invested in money market funds. In the long-term, we may use both internally generated funds and external sources to satisfy our debt obligations and other long-term liabilities. Cash and cash equivalents as of December 31, 2011 increased $191 million from December 31, 2010 primarily due to net cash provided by operating activities, partially offset by net cash used in financing activities and investing activities. See "Cash Flow Analysis" below for further discussion. 72 -------------------------------------------------------------------------------- Table of Contents Current restricted cash, which was $43 million as of December 31, 2011 and $60 million as of December 31, 2010, is not available for general use by us due to regulatory and other requirements and is classified as restricted cash in the Consolidated Balance Sheets. As of December 31, 2011 and December 31, 2010, current restricted cash primarily includes cash held for regulatory purposes at NASDAQ OMX Stockholm and cash held in customer margin accounts at IDCG and NOCC. Non-current restricted cash was $105 million at December 31, 2011 and December 31, 2010 and includes a deposit in the guaranty fund of IDCG of $80 million, as well as $25 million segregated for NOCC to improve its liquidity position, which are not available for general use. Repatriation of Cash Our cash and cash equivalents held outside of the U.S. in various foreign subsidiaries totaled $158 million as of December 31, 2011 and $61 million as of December 31, 2010. The remaining balance held in the U.S. totaled $348 million as of December 31, 2011 and $254 million as of December 31, 2010. Unremitted earnings of subsidiaries outside of the U.S. are used to finance our international operations and are generally considered to be indefinitely reinvested. It is not our current intent to change this position. However, the majority of cash held outside the U.S. is available for repatriation, but under current law, could subject us to additional U.S. income taxes, less applicable foreign tax credits. Share Repurchase Program In October 2011, our board of directors approved a share repurchase program authorizing NASDAQ OMX to repurchase in the aggregate up to $300 million of our outstanding common stock. These purchases may be made from time to time at prevailing market prices in open market purchases, privately-negotiated transactions, block purchase techniques or otherwise, as determined by our management. The purchases will be funded from existing cash balances. The share repurchase program may be suspended, modified or discontinued at any time. During the fourth quarter of 2011, we repurchased 3,983,481 shares of our common stock at an average price of $25.10, for an aggregate purchase price of $100 million. Financial Investments, at Fair Value Our financial investments, at fair value totaled $279 million as of December 31, 2011 and $253 million as of December 31, 2010 and are primarily comprised of trading securities, mainly Swedish government debt securities. Of these securities, $212 million as of December 31, 2011 and $190 million as of December 31, 2010 are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm's clearing operations. This balance also includes our available-for-sale investment security in DFM valued at $18 million as of December 31, 2011 and $33 million as of December 31, 2010. See Note 5, "Investments," to the consolidated financial statements for further discussion of our trading securities and available-for-sale investment security. 73-------------------------------------------------------------------------------- Table of Contents Debt Obligations The following table summarizes our debt obligations by contractual maturity: December 31, December 31, Maturity Date 2011 2010 (in millions) 3.75% convertible notes (net of discount)(1) October 2012 $ - $ - 2.50% convertible senior notes August 2013 88 388 4.00% senior unsecured notes (net of discount) January 2015 399 398 $1.2 billion senior unsecured five-year credit facility: $450 million senior unsecured term loan facility September 2016 439 - $750 million revolving credit commitment September 2016 226 - 5.25% senior unsecured notes (net of discount) January 2018 367 367 5.55% senior unsecured notes (net of discount) January 2020 598 598 $700 million senior unsecured term loan facility Repaid September 2011 - 570 Total debt obligations 2,117 2,321 Less current portion (45 ) (140 ) Total long-term debt obligations $ 2,072 $ 2,181 (1) As of December 31, 2011 and December 31, 2010, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. See Note 8, "Debt Obligations," to the consolidated financial statements for further discussion of our debt obligations. In addition to the revolving credit commitment, we also have other credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $447 million ($206 million in available liquidity and $241 million to satisfy regulatory requirements), none of which was utilized at December 31, 2011. At December 31, 2010, these credit facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized. At December 31, 2011, we were in compliance with the covenants of all of our debt obligations. See Note 8, "Debt Obligations," to the consolidated financial statements for further discussion of our debt obligations. Derivative Clearing and Broker-Dealer Net Capital Requirements Derivative Clearing Operations Regulatory Capital Requirements We are required to maintain minimum levels of regulatory capital for our clearing operations for NASDAQ OMX Stockholm, NASDAQ OMX Commodities and IDCG. The level of regulatory capital required to be maintained is dependent upon many factors, including market conditions and creditworthiness of the counterparty. At December 31, 2011, we were required to maintain regulatory capital of $296 million which is comprised of: • $4 million of restricted cash; • $80 million of non-current restricted cash; and • $212 million primarily in Swedish government debt securities. These securities are included in financial investments, at fair value in the Consolidated Balance Sheets as of December 31, 2011. 74 -------------------------------------------------------------------------------- Table of Contents In addition, we have available credit facilities of $241 million which can be utilized to satisfy our regulatory capital requirements. See "Debt Obligations" above for further discussion. Broker-Dealer Net Capital Requirements Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, are subject to regulatory requirements intended to ensure their general financial soundness and liquidity. These requirements obligate these subsidiaries to comply with minimum net capital requirements. At December 31, 2011, Nasdaq Execution Services was required to maintain minimum net capital of $0.3 million and had total net capital of $11.9 million, or $11.6 million in excess of the minimum amount required. At December 31, 2011, NASDAQ Options Services also was required to maintain minimum net capital of $0.3 million and had total net capital of $3.3 million, or $3.0 million in excess of the minimum amount required. Other Capital Requirements NASDAQ Options Services also is required to maintain a $2 million minimum level of net capital under our clearing arrangement with OCC. Cash Flow Analysis The following tables summarize the changes in cash flows: Year Ended December 31, 2011 2010 Percentage Change (in millions) Net cash provided by (used in): Operating activities $ 669 $ 440 52.0 % Investing activities (146 ) (118 ) 23.7 % Financing activities (325 ) (595 ) (45.4 )% Effect of exchange rate changes on cash and cash equivalents (7 ) (6 ) 16.7 % Net increase (decrease) in cash and cash equivalents 191 (279 ) # Cash and cash equivalents at the beginning of period 315 594 (47.0 )% Cash and cash equivalents at the end of period $ 506 $ 315 60.6 % # Denotes a variance greater than 100.0%. Net Cash Provided by Operating Activities The following items impacted our net cash provided by operating activities for the year ended December 31, 2011: • Net income of $383 million, plus: • Non-cash items of $206 million comprised primarily of $109 million of depreciation and amortization expense, $36 million of share-based compensation expense, $31 million for debt extinguishment and refinancing charges, $25 million related to loss on assetretirements and impairment charges, and $13 million related to accretion of debt discounts, partially offset by $10 million of excess tax benefits related to share-based compensation. • Decrease in other assets of $69 million primarily due to a decrease in non-current deferred tax assets related to the utilization of a capital-loss carry-back. • Increase in accounts payable and accrued expenses of $24 million primarily due to the timing of payments and an increase in accrued interest payable. 75 -------------------------------------------------------------------------------- Table of Contents • Increase in Section 31 fees payable to SEC of $24 million primarily due to higher fee rates in 2011. Partially offset by a: • Decrease in other liabilities of $22 million primarily reflecting the utilization of sublease reserves and decreased accrued taxes. • Decrease in deferred revenue of $14 million mainly due to the timing and delivery of Market Technology projects. The following items impacted our net cash provided by operating activities for the year ended December 31, 2010: • Net income of $389 million, plus: • Non-cash items of $178 million comprised primarily of $103 million of depreciation and amortization expense, $37 million for debt extinguishment and refinancing charges (including $28 million for the write-off of the remaining unamortized balance of debt issuance costs incurred in conjunction with our senior secured creditfacilities in place as of December 31, 2009 and $9 million in costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge), $33 million of share-based compensation expense, $14 million related to accretion of debt discounts, $11 million for loss on divestiture of businesses, $6 million related to loss on asset retirements and impairment charges, and $6 million related to amortization of debt issuance costs, partially offset by deferred income taxes of $35 million. Partially offset by a: • Increase in other assets of $85 million primarily related to a prepaid expense for a data center lease of $32 million, an increase in non-current restricted cash related to $25 million segregated for NOCC to improve its liquidity position and an increase of $30 million in current restricted cash which relates to cash held on customer margin accounts at IDCG and NOCC, as well as increases related to regulatory requirements within NASDAQ OMX Nordic. • Decrease in Section 31 fees payable to SEC of $55 million primarily due to lower fee rates in 2010. We expect that net cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, accounts receivable collections, share-based compensation and the timing and amount of other payments that we make. Net Cash Used in Investing Activities Net cash used in investing activities for the year ended December 31, 2011 primarily consisted of purchases of trading securities, purchases of property and equipment and cash used for acquisitions, partially offset by proceeds from sales and redemptions of trading securities. In 2010, cash used in investing activities primarily related to purchases of trading securities, cash used for acquisitions, and purchases of property and equipment, partially offset by proceeds from sales and redemptions of trading securities. Net Cash Used in Financing Activities Net cash used in financing activities for the year ended December 31, 2011 primarily consisted of the repayment of debt obligations of $948 million consisting of the repayment of our term loans in place as of December 31, 2010, or the Term Loans, of $570 million, repayment of $335 million of the aggregate principal amount outstanding of the 2013 Convertible Notes for $343 million, a required quarterly principal payment of $11 million on our $450 million funded term loan, or 2016 Term Loan, and an optional principal payment of $24 million on our revolving credit commitment. We also utilized $100 million of cash in connection with our share 76 -------------------------------------------------------------------------------- Table of Contents repurchase program. These decreases were partially offset by proceeds from debt obligations of $700 million consisting of $450 million in proceeds received from the issuance of the 2016 Term Loan and $250 million in proceeds received from borrowings under our revolving credit commitment. For further discussion of the 2016 Term Loan, as well as the repayment of our debt obligations, see "Credit Facilities," of Note 8, "Debt Obligations," to the consolidated financial statements. Net cash used in financing activities for the year ended December 31, 2010 primarily consisted of the repayment of debt obligations of $2.2 billion consisting of the repayment of our senior secured credit facilities in place as of December 31, 2009 of $1.7 billion, repayment of our $370 million senior unsecured bridge facility, repayment of $130 million on the Term Loans, including optional payments of $60 million, and a $16 million payment related to the payoff of our subordinated debt obligation assumed in the acquisition of certain subsidiaries of Nord Pool. We also utilized $797 million of cash in connection with our share repurchase program, which includes our stock repurchase from Borse Dubai. These decreases were partially offset by net proceeds received of $2.4 billion, which is comprised of the following: • $1 billion from the issuance of senior unsecured notes; • $700 million from the issuance of Term Loans; • $370 million from the issuance of the 2018 Notes; and • $370 million from our senior unsecured bridge facility. For further discussion of our debt obligations, see Note 8, "Debt Obligations," to the consolidated financial statements. For further discussion of our share repurchase programs, see "Share Repurchase Programs and Share Repurchase from Borse Dubai," of Note 12, "NASDAQ OMX Stockholders' Equity," to the consolidated financial statements. Contractual Obligations and Contingent Commitments NASDAQ OMX has contractual obligations to make future payments under debt obligations by contract maturity, minimum rental commitments under non-cancelable operating leases, net and other obligations. The following table shows these contractual obligations as of December 31, 2011: Payments Due by Period Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years (in millions) Debt obligations by contract maturity(1) $ 2,641 $ 127 $ 341 $ 1,057 $ 1,116 Minimum rental commitments under non-cancelable operating leases, net(2) 499 76 124 115 184 Other obligations(3) 29 24 5 - - Total $ 3,169 $ 227 $ 470 $ 1,172 $ 1,300 (1) Our debt obligations include both principal and interest obligations. At December 31, 2011, an interest rate of 1.67% was used to compute the amount of the contractual obligations for interest on our 2016 Term Loan and an interest rate of 1.46% was used to compute the amount of the contractual obligations for interest on our revolving credit commitment. All other debt obligations were calculated on a 360-day basis at the contractual fixed rate multiplied by the aggregate principal amount at December 31, 2011. See Note 8, "Debt Obligations," to the consolidated financial statements for further discussion. (2) We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs. (3) In connection with our acquisitions of FTEN, SMARTS and Glide Technologies, we entered into escrow agreements to secure the payment of post-closing adjustments and other closing conditions. At December 31, 2011, these agreements provide for future payments of $29 million and are included in other current liabilities and other non-current liabilities in the Consolidated Balance Sheets. 77 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available Collateral Received for Clearing Operations Through our clearing operations in the derivatives markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by us for the purpose of trading on our own behalf and the resale and repurchase agreements are not used by us for financing purposes. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. See "Derivative Positions, at Fair Value," of Note 14, "Fair Value of Financial Instruments," to the consolidated financial statements for further discussion. As a legal counterparty of each transaction, we bear the counterparty risk between the purchaser and seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the application country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital. Proposed regulations, including the European Market Infrastructure Regulation, are expected to require CCPs to maintain a default fund to which clearing members of the CCP will have to contribute. In anticipation of these regulations, NASDAQ OMX Stockholm is currently preparing for the implementation of a member sponsored default fund with an expected launch date in March 2012. The level of regulatory capital will be determined in accordance with our regulatory capital policy, as approved by the SFSA. Clearing member contributions will be proportional to the exposures of each clearing member. We require our customers and clearing members to pledge collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $5.0 billion at December 31, 2011 and $8.7 billion at December 31, 2010. This pledged collateral is held by a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. Since these funds are not held by NASDAQ OMX Commodities or NASDAQ OMX Stockholm and they are not available for our use, we do not receive any interest income on these funds. We also require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations and to provide collateral to cover the daily margin call. Customer pledged cash collateral held by IDCG and NOCC, which was $9 million at December 31, 2011 and $15 million at December 31, 2010, is included in restricted cash with an offsetting liability included in other current liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG and NOCC. Clearing member pledged cash collateral, included in IDCG's guaranty fund, was $8 million at both December 31, 2011 and December 31, 2010. This cash is included in non-current restricted cash with an offsetting liability included in other non-current liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG. Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, pledged collateral which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the members cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all members to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default. 78 -------------------------------------------------------------------------------- Table of Contents Guarantees Issued and Credit Facilities Available In addition to the collateral pledged by market participants discussed above, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities, to provide further liquidity and default protection. Financial guarantees issued to us totaled $4 million at December 31, 2011 and $5 million at December 31, 2010. Credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $447 million ($206 million in available liquidity and $241 million to satisfy regulatory requirements), none of which was utilized at December 31, 2011. At December 31, 2010, these facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized. We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. Leases We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our lease agreements contain renewal options and escalation clauses based on increases in property taxes and building operating costs. Other Guarantees We have provided other guarantees of $17 million as of December 31, 2011 and $18 million as of December 31, 2010. These guarantees primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have provided performance guarantees of $6 million as of December 31, 2011 and December 31, 2010 related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support these guarantees. We have also provided a $25 million guarantee to our wholly-owned subsidiary, NOCC, to cover potential losses in the event of customer defaults, net of any collateral posted against such losses. We believe that the potential for us to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for the above guarantees. Brokerage Activities Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to a clearinghouse or exchange, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral, as well as meet certain minimum financial standards. Nasdaq Execution Services' and NASDAQ Options Services' maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. [ Back To TMCnet.com's Homepage ]